The Mannheim-based think tank's monthly poll of economic sentiment jumped to 6.9 points from -15.7 in November, coming in well above the consensus forecast in a Reuters poll of 41 analysts for a reading of -12.0.

"Signs of an economic turnaround in Germany get stronger as the November downturn in German investor confidence turns out to have been a blip," said Christian Schulz of Berenberg bank.

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A separate gauge of current conditions in the ZEW survey - one of the closest-watched on the German economy - rose to 5.7 from 5.4 in November, above a consensus for 5.0.

"This picture demonstrates that we are not heading into a recession," said ZEW economist Christian Dick.

Many economists expect Germany's economy to contract in the fourth quarter amid weakness in key European trading partners. But the ZEW, echoing a separate survey from the Munich-based Ifo institute, suggests it could bounce back in early 2013, avoiding the second quarter of contraction that would technically put the country in recession.

The most recent Ifo report showed German business morale rising for the first time in seven months in November due to buoyant exports outside the euro zone and the prospect of strong Christmas sales.

Commenting on the ZEW survey, Aline Schuiling of ABN Amro said: "We think the final quarter of the year will be the trough and expect a gradual recovery from around the turn of the year."

Improving global outlook

The euro rose to a session high against the dollar and European shares also pushed higher, while Bunds extended losses after the survey results.

Dick said improving conditions in the United States and China should help German exports to rebound.

Data released on Monday showed Germany's trade surplus narrowed in October as growth in exports slowed to just 0.3 per cent in the face of weakening demand in Europe, destination for 60 per cent of the country's exported goods.

Last week, Germany's central bank slashed its growth outlook for next year, forecasting a meagre expansion of 0.4 per cent compared to 1.6 per cent previously, but Dick said the Bundesbank forecast was "too pessimistic".

In a statement on Tuesday, Germany's economy ministry said it expected the economy to remain weak in the final quarter of 2012 due to declining investment, industrial output and weaker exports.

"An improvement in the sentiment indicators could be a sign that the weak phase will be gradually overcome after the winter quarters," the ministry added.

ZEW President Wolfgang Franz cautioned that Germany's steady recovery hinged on developments in the euro zone, where the mood has improved since the European Central Bank vowed to buy the debt of struggling countries under certain conditions.

The ZEW index was based on a survey of 278 analysts and investors conducted between Nov. 26 and Dec. 10.